WARNING: Package 1 of austerity measures will increase the number of insolvency dramatically. What are the most affected areas

The effects felt by the consumers following the implementation of the Government package 1 will propagate directly in the profit and loss accounts of the companies, forcing them to sail in a much more difficult business environment, points out the insolvency specialists.

Package 1 of austerity measures will dramatically increase the number of insolvency. Photo archive

Increasing taxes in package 1 of measures places each company in front of a strategic dilemma, it is shown in a specialized analysis that lists some of the problems that companies will have: to absorb additional costs, sacrificing the profit margin, or to transfer them to the consumer through higher prices, risking a decrease in the volume of sales. The optimal decision depends on a fundamental economic concept: the elasticity of the demand.

Who will be the winners, losses and survivors

For the goods of strict necessity, such as bread, milk or essential drugs, the demand is relatively inelastic – consumers will continue to buy them even at a higher price. In this case, companies can transfer a large part of the tax burden without suffering a dramatic volume decrease. In contrast, for non-essential goods, those with many available substituents (for example, soft drinks, holiday packages) or those with high value (cars, homes), the demand is elastic. An increase in the price will cause a more than proportional decrease in the quantity sold, leading to a decrease in total turnover.

From this perspective, winners, losses and survivors will be in the business environment. According to Florian Mateiță, insolvency practitioner and Rominsolv partner, among the most affected sectors are:

• Retail & FMCG:
  This sector will face a high negative impact. The compression of the purchasing power will reduce the total volume of sales, while the orientation of consumers to cheap products will erode margins. The suppliers of this sector “enjoy” a double blow. On the one hand, their direct customers (supermarkets, restaurants) can reduce volumes of order due to low demand. On the other hand, the same customers, confronted with their own cash flow problems, will delay payments. This puts a huge pressure on the liquidity of the producers, which have their own fixed costs to cover. It is not surprising that, together with trade and construction, the processing industry records one of the highest insolvency numbers, reflecting the difficulties propagated from the final customer to the manufacturer, respectively the additional pressure to lose significant sales volumes and see a migration of consumers to alternatives at a low price.
• Horeca (hotels, restaurants, catering):
  The impact is mixed, but with a negative tendency. On the one hand, although the sector benefits from a fiscal advantage by maintaining the reduced VAT rate to 11%, the perception of consumers and industry is also to increase taxes. On the other hand, being an eminently dependent area depending on the discretionary expenses and still vulnerable according to the successive crises of recent years, it will suffer from the decrease of the real income of the population. The survival will depend on the ability to provide an excellent value for money and to address some clients less sensitive to the general economic context.
• Shipment and logistics:
  The impact is high and negative. The increase of excise duty on fuels is a direct and immediate increase in operational costs. These costs will be inevitably transferred downstream, lifting the price of transport of goods and people and generating inflationary chain effects. Companies with large fleets and small margins will be the most vulnerable.
• Real estate market:
  This sector is facing a major shock, the impact being high and negative. Eliminating the reduced VAT rate for the purchase of new housing is a sudden and substantial increase in the final price for the buyer. In a market already tense by the high level of interest, this measure is likely to freeze the demand, slow down the rhythm of the transactions and to put a huge pressure on the turnover and the development plans of real estate developers.
• Construction Square: In the context of the dramatic decrease in the sales of real estate, most likely the number of residential construction sites will decrease. A real estate developer who no longer sells apartments due to the elimination of the low VAT and the big interest will stop or slow down the ongoing projects and postpone payments to cement, brick, steel, polystyrene or PVC carpentry. These producers, who are already experiencing their own crises related to the price of raw materials and energy, wake up between growing costs and blocked receipts, a situation that can quickly lead to severe financial difficulties and even insolvency. Seeing the full part of the glass, the problems of residential builders can be an opportunity for the beneficiaries of investments in infrastructure and industrial projects, which, thus, have the chance to benefit from the unused potential in the residential area, respectively machines, specialized human resources.
• Banking industry:
  The impact is medium and negative. The increase of the additional tax on the turnover from 2% to 4% directly reduces the profitability of the sector. Indirectly, a generalized economic slowdown will lead to a weaker demand for loans and, more importantly, to a potential increase in non -performing loans, affecting the quality of assets and future income.

Beyond these direct effects, the fiscal package will act as a catalyst to strengthen the market in the mature sectors. The shock external to companies, which increases costs and reduces incomes simultaneously, will test the resilience of each. Large companies, with savings of scale, higher negotiation power and easy access to financing, will be able to absorb this more efficient shock. In contrast, small and medium -sized companies, with thin margins and limited liquidity reserves, will become extremely vulnerable. The liquidity crisis and the decrease of the turnover will force many marginal players to leave the market, either by bankruptcy or by sale. Large, more resilient companies will be in a position to take over the market share of the missing ones, leading to a higher concentration of economic power in sectors such as retail, transport and Horeca.

Bumerang effect in the real estate sector

Another effect with boomerang potential could occur in the real estate sector. Although the objective of the Government is to increase the budget revenues by applying the standard 21% to all transactions, the economic effect could be contrary. Such a sudden increase in the final price is likely to block the demand, leading to a collapse of the number of transactions. Thus, although the VAT rate per transaction increases, the tax base (the number of transactions) could decrease so much that the total amount collected from VAT on real estate is paradoxically, smaller than before. Moreover, a blocking of the construction sector, an important engine of the economy, would reduce the budgetary receipts from salary taxes, profit and social contributions in this field, partially or totally cancel the expected profit.

A structural danger, often underestimated in short -term analyzes, is the erosion of the competitiveness of the products made in Romania and their replacement with cheaper imports. The fiscal package, by increasing the costs and lowering the domestic demand, creates a price disadvantage for local producers. In a market where consumers, with diminished purchasing power, become extremely sensitive to the price, they will naturally orient themselves to more accessible alternatives.

This phenomenon, supported by the supremacy of the big retail chains, risks triggering a substitution of domestic production with own imports or brands, especially in sectors such as consumer goods, light industry, furniture or even certain building materials. Consequently, instead of stimulating the local economy, part of the remaining consumption will drain outwards, deepening the commercial deficit, which is already at an exorbitant level.

In the medium term, this can lead to a contraction of industrial production, closing production capacities and losing jobs. The Bumerang effect will also be felt at the level of the state budget: the decrease of the internal economic activity will reduce the tax base for profit tax, income and social contributions, thus undermining the budgetary consolidation objective that was the basis of tax increases.

“Therefore, I come back and say it: the situation described above must be fought hard by concentrated, long -term policies, which will stimulate the Romanian production simultaneously with Increasing the weight of the consumption of domestic products and services ”, concludes Florian Mateiță, insolvency practitioner and Rominsolv partner.